Is it so bad to rent?
‘SYDNEY’S millennial generation are in danger of renting well into their late 40s’
‘Locked out: It’s all gone horribly wrong for generation rent’
These are just a couple of media headlines suggesting those who rent are doomed. Frankly, it’s an urban myth. Renters have many of opportunities to leverage off renting. We will explore just how renting can actually be a positive move – financially and emotionally.
Many Aussies persist with the great Aussie Dream of owning their own house on their own piece of land. It remains firmly entrenched in our psyche. As part of that psyche those who rent are seen as – and may feel – they are chasing an unachievable dream.
Surely rent money is dead money? And with property prices bound to rise, surely you will get ahead of the curve in the long run?
But our blinkered vision of the Aussie Dream forgets about the high costs in buying and maintaining a house. Stamp duty remains a huge speed bump. There are rates and water bills and, of course, that Herculean climb to pay your mortgage and its rising interest rates. A golden rule, by the way: don’t move too often and paying the high costs associated with that like stamp duty, removalist, utility connection fees...
Renting can benefit your pocket
There is some good news for renters. Instead of ploughing all their money into their property, renters can look at using their capital to invest into other assets.
A US study found renting to be the superior investment strategy [1]while Australian Reserve Bank research[2] suggests there is little difference in buying or renting from an investment point of view.
Independent local economic research shows that overall, over the last 30 years, property owners have had better returns than renters, but – importantly - not every year. Timing can be very important. When house prices fall or plateau – something we face in many cities now – renters come up on top.
As previously stated, a significant plus for renters is they can turn to other investments. Shares remains superior to other forms of saving. But for home owners just to make the hefty mortgage repayments is a struggle, let alone invest cash elsewhere. Renters can invest the cash they save into maintaining a leveraged ASX200 investment[3]
Creating a diversified investment portfolio[4] can yield high rates of return without relying on the housing market remaining stable.
Another growing financial trend is young people, often with two healthy incomes, looking to rent at the same time buying lower-priced investment properties to lease out, helped by Australia's negative gearing policy. They can use the rent towards paying off their mortgage on the property while having a home in their chosen area. Be mindful that the negative gearing policy is always subject to change with new government.
A lifestyle choice
Renting not only gives renters more financial freedom it can give them more lifestyle choices. Moving home because of a job or just to be in a more favourable area is much simpler and cheaper for renters.
Many millennials, in particular, are happy to rent. It means they can choose to live in an area which would be beyond their means to buy in.
The adage of ‘rent where you want to live and buy where you can afford’ resonates with many as an alternative investment strategy to maximise the tax benefits of owning property.
It also gives them a flexibility if they want or need, for their jobs, to move to another area without the hassle of selling their present home and then looking for another one somewhere else.
And there’s more … co-living
The urge to rent has seen some other interesting possibilities emerge.
“The Sydney Morning Herald” reports that a form of dormitory living for adults has been established in the Sydney city area.
Called co-living, it features private rooms and large common areas and shared utilities – a bit like the university dormitories of old, but very much 21st Century. Rentals are similar to normal rent or higher but with more flexibility for short or long-term stays but include all utilities and internet, with flexible terms for both short and long-term stays and added features like Wi-Fi.
The concept is already popular in Europe, Asia and North America and is now growing in Australia, with operators looking to establish the sites in most major cities.
According to one local operator the co-living concept was originally expected to attract mainly young people but those over 60 are also embracing co-living.
Older renters can benefit
One challenge facing today’s renters is when they become tomorrow’s retirees. Australia’s aged pension and superannuation system is not at present set up for people who rent.
However, there are still pluses in renting in retirement whatever your age. A Texan study showed that renting offers greater flexibility to retirees seeking the right kind of environment for their new lifestyle. And getting that location right can have tremendous benefits for health and longevity.
The same financial positives for younger renters can be equally beneficial for astute older renters. As mentioned previously, without a burdening mortgage and the possible instability of the housing market, older renters can create a diversified investment portfolio to offset their rent and cost of living.
And with the continuing rise in people renting here there is every chance future governments will seek to a change in policy and legislation to ensure all Australians can reap the benefits of a rental lifestyle.
So, is it so bad to rent?
So, back to the original question: is it better to buy or rent a property?
Well, the Reserve Bank of Australia (RBA)[5] released a study one year saying that over time, it's cheaper to rent than buy a house. But just 12 months later a RBA researcher concluded that under current market conditions, it's a better idea[6] to buy than rent!
But as you have read, renting gives renters choice, unlike those locked into crippling mortgage repayments. Renting not only gives them more financial freedom – and there are many avenues they can invest very profitably - it can give them more lifestyle choices.
Home ownership is no longer the be-all and end-all in Australia. Astute renters who carefully plan their futures can live happily in a rented premises as long as they wish. After all, with many more areas offering rentals, if they get bored with where they are living it’s not too hard to move to “greener pasture”.
Note: This content in this article should not be treated as providing any definitive advice and should not be relied upon as such. It is recommended that readers should always seek advice separately before taking any action based on this publication.
ENDS
[1] PwC 2019, “Emerging Trends in Real Estate” https://www.pwc.com/us/en/asset-management/real-estate/assets/pwc-emerging-trends-in-real-estate-2019.pdf)
[2] “A Model of the Australian Housing Market,” 2019 https://www.rba.gov.au/publications/rdp/2019/2019-01.html)
[3] Ernst and Young report: https://www.ey.com/au/en/newsroom/news-releases/news-ey-sydney-residents-better-off-renting-than-buying-in-60-per-cent-of-like-for-like-cases-since-1992
[4] https://www.sbs.com.au/news/comment-rent-or-buy-let-s-do-the-sums
[5] https://www.sbs.com.au/news/is-it-cheaper-to-rent-or-to-buy-the-rba-may-have-the-answer
[6] https://www.sbs.com.au/news/australian-house-prices-undervalued-by-30-per-cent-rba-officials
